Prior Week Summary
The Labor Department reported last week that jobless claims fell to the lowest level since 1973. Applications for unemployment benefits fell to 247,000, a decrease of 6,000 workers from the previous weekly period. The four-week moving average, which is less volatile, fell to 260,000 from 265,000 last week, giving the market another data point on the strength of the labor markets. The same report detailed that the number of workers with continuing claims fell to 2.1mm, the lowest reading on that metric in over 15 years.
Not surprisingly, given this backdrop, yields backed up meaningfully week-over-week, rising nearly 8 basis points at the two-year point while the 5-year rose 14 basis points in yield. As measured by the slope between 2s and 10s, the curve steepened by approximately 4 basis points over the week as the market recalibrates its expectations for inflation going forward.
In fact, recent gains in the commodity complex, as well as the previously mentioned strength in the labor market, have contributed to an increase in inflation expectations to recent highs. The five-year breakeven inflation rate derived by comparing nominal treasury yields to prices of Treasury Inflation-Protected Securities has increased nearly 60 basis points since the middle of February when expectations were the lowest.
While the market is placing relatively remote odds that the Fed will change the target range for Fed Funds at the meeting this week, Fed Funds futures markets imply a nearly 60% probability for the next hike at the December meeting.
The Look Forward
This week’s data calendar is relatively active, with updated data expected on the housing market and the state of the manufacturing sector. The Fed meeting will conclude on Wednesday, and is widely expected to result in no-change to the policy rate.